I’m a senior writer for 30 Point Strategies and a writer-at-large for Texas Monthly. I worked in daily journalism for 26 years, most recently as an award-winning business columnist for the Houston Chronicle, and before that, as a senior writer at Bloomberg News. I’ve written two books: Drowning in Oil: BP and the Reckless Pursuit of Profit, published in 2010 and The Man Who Thought Like a Ship, published in 2012. My other interests include slow boats, fast cars and classic rock, all of which may also creep into my writing from time to time.

It may be good news for Texas consumers for whom the state’s decade-old attempt at deregulation has been a costly failure.

The bankruptcy of Energy Future Holdings, which was formerly known as TXU, stems from the big pile of debt that the company amassed in its $45 billion leveraged buyout in 2007. A team of private equity investors, including Fort Worth billionaire David Bonderman, KKR and Goldman Sachs, orchestrated one of the largest buyouts in history in what turned out to be a wrong-way bet on natural gas.

As I explained in my column in the latest issue of Texas Monthly, the deal was designed to leverage the cost advantage of TXU’s fleet of coal-fired power plants. Under deregulation, the wholesale price of electricity in Texas was tied to the price of natural gas. That meant TXU could generate power with coal well below the market price, essentially locking in a profit on the spread between the costs of the fuels.

But soon after the deal closed, surging natural gas production from hydraulic fracturing caused gas prices to plunge, wiping out the cost advantage for TXU’s coal plants. Suddenly, the debt from the buyout became crippling.

The clouds of bankruptcy are gathering over the former TXU.

Had it not been for the debt, EFH probably could have weathered the downturn in gas prices. During the past five years, the company notes that it’s invested $10 billion in new projects and facilities improvements and hired 1,900 people.

“The value in this company is in our people, our plants, our mines and in our customers, EFH spokesman Allan Koenig said. “We have no plans to shed any of those.”

One of the options being discussed in the Chapter 11 bankruptcy, which the Journal predicts could come by late March or early April, would split the holding company for its retail and generating divisions, TXU Energy and Luminant, from the holding company for its Oncor transmission company, which is still regulated by the state.

A bankruptcy filing, of course, means that a lot of possibilities are on the table, and while no one is currently talking of carving up Luminant to satisfy creditors, the contentious nature of the talks and the complexity of case could lead to that result. Greater generator diversity could reduce Luminant’s market dominance in North Texas and bring greater competition on the generating side of the market.

“The bankruptcy could actually turn out to be a benefit to the deregulated environment,” said Geoffrey Gay, an attorney for the Texas Coalition for Affordable Power.

Consumers could use a break. Although electricity rates have eased in recent years as gas prices have fallen, deregulation remains a costly failure. Using data from the U.S. Energy Information Administration, TCAP recently released a study that found deregulation cost Texans and additional $22 billion between 2002 and 2012. Residents who live in parts of the Texas market that remain regulated on average still paid less than those in the alleged free market. Over the course of the decade, households in regulated areas saved an average of $4,500, TCAP found.

Breaking up Luminant’s market dominance won’t enable consumers to recoup those costs, but it could help bring more competition to a market that purports to welcome it.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.